Margaret Thatcher's economic legacy of free markets, free trade, competition,
low tax and a small state left an enduring stamp on Britain and the world.

No previous British Prime Minister has had an ism named after them. You cannot imagine Churchillism, Macmillanism, or Attleeism, and if such an ism had been conjured up, it would surely not have been about economics.

It is true that people do now speak of “Blairism”, but this seems to be more about a political style rather than anything of substance, and whatever it is, it certainly isn’t about economics.

By contrast, although it was more a set of loosely related ideas than a coherent economic philosophy, “Thatcherism” was both substantial and essentially about political economy.

Although the ism is attached to one person’s name, in both concept and implementation it bore the imprint of many other people.

The main high intellectual influences, coming via Keith Joseph, were from Friedrich von Hayek and Milton Friedman. Among politicians, Enoch Powell also left his mark. The practical ideas – and the implementation – were heavily influenced by several key ministers, especially Geoffrey Howe, Nigel Lawson, Norman Tebbit and Cecil Parkinson. But to forge Thatcherism, these different elements were given the indelible stamp of Baroness Thatcher’s own irrepressible personality.

As to why Baroness Thatcher should be the first PM to lend her name to an ism you have to look to both the person and the times.

Those who knew her well would not describe her as an intellectual, but Baroness Thatcher was ideological by nature. She understood the importance of ideas and she saw the connections between ideas and practical consequences. Moreover, she knew where she stood – and she relished telling others where she stood too.

But her political personality might not have developed fully in this way, and would certainly not have had such an impact on British politics, if it had not been for the circumstances of the time. When she first burst onto the stage it was a time for isms.

Domestically, the 1970s had been a period of crisis. At various points, not just the economy but the whole system of democratic government in Britain seemed at the point of collapse.

At the beginning of the Labour Government in the 1960s, Harold Wilson talked about the white heat of the technological revolution but Jim Callaghan’s government of the late 1970s went out – and Thatcherism was moulded – in the grey cold of the Winter of Discontent.

Baroness Thatcher would have seen her ideological enemy then as “socialism”, which had brought the country low: excessive levels of government spending and taxation, lax financial discipline and excessive power for the trade unions.

Internationally, the enemy was communism, as the Cold War still raged and the Soviet Union seemed extremely threatening. Thatcherism, like its transatlantic offshoot, Reaganism, was cast in opposition to these prevailing isms of the day.

So what was Thatcherism about?

Much of it was just the traditional liberal economic agenda, developed in the 19th century – free markets, free trade, competition, a small state, requiring only low levels of taxation, and financial probity.

In the early stages, this concern for financial probity was allied to crude monetarism, that is to say, belief that controlling the money supply would automatically give you low inflation, but this was not integral to the philosophy and by the mid 1980s it was effectively abandoned.

Saying that this was just a retread of old 19th century liberalism doesn’t convey how radical these ideas were at the time, after decades in which markets were held under suspicion and even in a supposedly capitalist country like the UK, the state’s role in the economy was overwhelming.

The terms left and right are often inadequate to describe the relations of political and economic ideas.

Thatcherism is usually depicted as extremely right wing, but whether this is accurate depends upon your analysis of what the spectrum, on which you may be at one end or the other, is all about.

The best way of understanding Thatcherism is to appreciate that it was fundamentally anticonservative. Indeed, on some definitions of the political spectrum, it was essentially left-wing. It was not just radical; it was revolutionary.

Accordingly, it inspired opposition bordering upon hatred from two of the most conservative parts of the polity – the patricians on the “left” of the Tory party, and the Old Guard of the Labour Party and the trade unions.

In many ways the opposition of the former group is more understandable. On the whole, they were fully aware of the upset which Thatcherism would bring to the existing order and they resented it. They found both the person and the policies vulgar.

The opposition of the latter group, by contrast, reflected an intellectual failure. They seem to have been blind to the idea of markets as operating in the interests of ordinary people and giving them power. But what they could not see, swaths of what used to be called the working class did – and as a consequence, in large numbers, they came to consider themselves Thatcherite.

Moreover, as a result of repeated Conservative political success founded on this bedrock of working class self-interest, the Labour Party eventually came to accept and even embrace market forces as the people’s friend. In this respect New Labour was part of Thatcherism’s legacy.

Yet there was more to Thatcherism than simply the liberal agenda. Classical liberalism was fleshed out with some more homespun beliefs – in value for money, efficiency, self-reliance, saving and wealth accumulation.

Under Baroness Thatcher it was again acceptable – indeed admirable – to be rich. In a remark which spoke volumes, she once said that it was not enough for the Good Samaritan to be good. He also had to have money for his feelings of charity to be translatable into effective action.

One implication of self reliance, you would think, is a reduction in the size and scope of the welfare state. And this surely was one of Baroness Thatcher’s ambitions. In fact, Thatcherism’s achievements in this regard were limited.

The welfare budget continued to soar and during the Thatcher governments, large numbers of people became welfare-dependent and marginalised from mainstream society. This was due not to some weakness in Thatcherite thinking but rather to the limitations imposed by contemporary political reality. As the current disputes over welfare suggest, it would not be at all surprising if this part of Thatcherism achieved eventual fulfilment in the decades to come.

There were some aspects of Thatcherism in practice which did not sit easily with the 19th century liberal agenda, including in particular, a fondness for selected government intervention to suppress or direct the market mechanism – provided such intervention was of the “right” sort.

For instance, Baroness Thatcher’s ministers had the devil’s own job convincing her to do away with mortgage interest tax relief. She would not budge.

Indeed, against the policy of letting its real value wither on the vine, she once managed to have its value increased.

This was supposedly government assistance in favour of a good cause, namely home ownership. You were helping people to help themselves.

Anyway, as she would have seen it, the people that it benefited were “our people”.

Baroness Thatcher was also famously a patriot and sorely wanted Britain to succeed economically. But unlike many people of this type, she was not an economic nationalist. The national interest was best served by competition and free markets. This was the very opposite of mercantilism or Gaullism.

The clearest example of this, and one which arguably led to her Conservative government’s greatest achievements, was its decision to end the Stock Exchange’s cosseted existence and open up the financial markets to unfettered competition and foreign ownership.

Those initially disadvantaged by this move were “our people” – namely the serried ranks of stockbrokers, jobbers and merchant bankers who had enjoyed a very comfortable and prosperous existence, thank you very much, and whose forebears had overwhelmingly voted Conservative for generations.

The Big Bang changes undermined their comfortable existence. They also led to the 'Wimbledonisation' of the City, as almost all the old British firms were bought up by foreign entities, leaving the UK hosting the event but with no leading British players. Yet London prospered beyond imagining, to the point where it has now overtaken New York as a financial centre.

Despite these successes, what was crucially missing from the set of ideas called Thatcherism was any vision of community, save of the nation.

Thatcherism was a vision of individuals, or at most families, atomistically pursuing their own self-interest, in competition with one another.

Baroness Thatcher seemed only to embrace community values when it came to war, or civil emergencies and accidents when, rather incongruously, she would often descend on the hapless victims to offer her support, while heaping praise on the members of the emergency services who, on a strict interpretation of the Thatcherite, self-aggrandising creed, should presumably have been merely pursuing their own self-interest.

She famously once said: “There’s no such thing as society. There are individual men and women and there are families.”

These words were meant to be interpreted in opposition to the prevailing ideology of the 1970s, which still lingered on in the 1980s in hearts and minds, which attributed everything, both good and ill, to “society”, thereby leaving no scope for individual initiative and responsibility.

As such, they were well meant and well taken. But the words also suggested – and revealed – a fundamental selfishness at the heart of Thatcherism and this subsequently proved to be its undoing.

It was in reaction to widespread popular revulsion against the me-ism and blatant self-advancement of the Thatcher era that Tony Blair was able to promote the Labour Party as a party of community, shared values and collective action.

Hence David Cameron’s apparent view that his chief challenge is to represent the Conservatives also as a party of community values, if you like to reconnect it with its pre-Thatcherite past.

In fact, his real challenge is surely greater than this: it is not to ditch Thatcherism, but rather to build on it by adhering to its essential tenets while filling in its major lacuna, namely its lack of a proper view of society itself. In other words, it is to rediscover community without building up the state, thereby linking up Thatcherism with the Conservative Party’s deep traditions of community and duty. That is what his idea of the “Big Society” is all about.

So, what did Thatcherism achieve? First, it should be said that the initial economic performance was abysmal.

The rhetoric had it that tough control of the money supply would reduce inflation automatically and lower inflation would promote economic growth and employment.

How far this was genuinely believed and how far it was just a means to an end is hard to establish. But what happened is that the attempt to control the growth of the money supply achieved low inflation through a circuitous route.

It involved the imposition of very high interest rates, which were raised from 12pc to 14pc in the first budget in 1979 and then again to 17pc in November. Meanwhile, helped by the near doubling of VAT from 8pc to 15pc, inflation soared.

The money supply still did not come under control but, ironically, inflation eventually did.

Yet there was nothing revolutionary here – except in the preparedness to see the policy through, come what may. For what brought inflation down was the effects of the high interest rates and a cripplingly high pound, which devastated much of British industry, causing unemployment to soar.

The recession of 1979-81 was the worst since the 1930s and it delivered a blow from which Britain’s old-style metal-bashing industry never recovered.

This was subsequently seen as something of an achievement but at the time it was regarded as an inevitable, but largely regrettable, sideeffect of getting inflation down.

These were the days of TINA – There Is No Alternative.

The early years were also marked by failure on the size of the state. Baroness Thatcher’s governments found it devilishly hard to reduce government spending as a share of GDP.

And since they were simultaneously trying to reduce public borrowing, they did not achieve much in reducing overall taxation either.

There was an eye-catching structural move, though. In the very first budget, the top rate of income tax was cut from 83pc to 60pc and the basic rate of tax was cut from 33pc to 30pc, financed by the increase of VAT from 8pc to 15pc.

Baroness Thatcher’s economic policies made her and her government deeply unpopular. For quite a while it would have seemed incredible that she would be credited with turning round Britain’s economic performance.

Although the economy started to recover in late 1981, it wasn’t until Nigel Lawson took over as Chancellor, after the election victory of 1983, that economic performance visibly started to improve.

There were some notable successes with long-lasting consequences. Privatisation came to be regarded as one of Thatcherism’s greatest achievements.

In fact, it did not feature in the objectives of the early Thatcher government. Indeed, it was stumbled upon as a way of raising money for the Treasury and thereby reducing the public sector borrowing requirement.

Its ability to deliver massive efficiency savings came largely as a surprise. But once these benefits were discovered the government went for it with a purpose.

And the way that nationalised industries were privatised was decidedly Thatcherite – with a substantial allocation of shares available, on application, to small savers who, if gaining some shares, would secure an immediate and virtually guaranteed profit. After all, again these were “our people”.

But Thatcherism failed to recognise the appropriate borders to the public and private realms and hence to appreciate which privatisations would work and which would not. This resulted in a botched privatisation of the railways, the consequences of which are still very much with us.

Interestingly, it also resisted the logically consistent but politically threatening extension of the market into a realm of the transport system where the price mechanism did not operate, namely private travel by road.

Road pricing is in accordance with belief in markets but it would not be right to describe it as Thatcherite. Thatcherism saw unrestricted private travel by car as the expression of individual freedom – even if it amounted to the freedom to be stuck in never-ending traffic jams.

Surely Thatcherism’s greatest achievement was the freeing up of the labour market. The UK has gone from one of the highest unemployment rates in the developed world to one of the lowest.

There were three aspects of the transformation: the privatisation of large parts of the economy, as referred to above, which brought large numbers of workers who had previously been subject to the political process into the ambit of market forces; a programme of legislative change which weakened the powers of trade unions and increased employers’ flexibility, and the all important fact on the ground – the defeat of the miners’ strike in 1985.

It cannot be emphasised how important the latter was for the whole mood of the economy – and hence for what was possible in labour relations. In 1974, when the then Conservative prime minister, Edward Heath, had called a general election on the issue of who governs Britain, the government or the unions, the electorate just about gave him the verdict “the unions”.

Accordingly, the defeat of the miners in 1985 was a landmark event. It spelt the end of militant trade unionism in this country and shifted the balance of expectations – and hence the balance of power – in employers’ favour.

Taxes were right at the heart of Thatcherism and under Thatcherism the tax system was transformed, with effects on both social attitudes and the incentive to work.

It is true that the overall burden of taxation did not fall very much. In 1979 it stood at just over 40pc of GDP. When Baroness Thatcher left office in 1990 it was just over 39pc and when the Conservatives were defeated by Labour in 1997 it was still just over 37pc.

But the structure was altered. From 33pc in 1979, the headline basic rate of income tax fell from 23pc in 1997/8. More importantly, the top marginal rate was slashed.

It seems incredible now that Nigel Lawson’s 1987 decision to reduce the top rate of tax from 60pc to 40pc was so controversial but at the time it was dynamite. Despite this controversy, the 40pc rate continued under Labour until, late on, Gordon Brown hiked it to 50pc for political reasons.

There was one major Thatcherite tax failure, namely the poll tax, which made the government deeply unpopular and was eventually replaced with Council Tax. There have since been no moves to restore it.

But the revival of interest in flat taxes is clearly in the Thatcherite tradition. The adoption of flat taxes in Eastern Europe and Russia and their apparent success is putting pressure on EU members to flatten their tax systems, and as this pressure leads to effective action then so the pressure on the UK to make taxes flatter, under governments of whatever hue, will intensify. The Thatcherite agenda for the tax system is not dead and buried.

So far I have dealt only with the domestic aspects of Thatcherism. But there are key international aspects as well. Perhaps Thatcherism’s greatest impact was in eastern Europe. The Baltic States in particular adopted the Thatcherite agenda pretty much wholesale. Their subsequent success is one of Thatcherism’s enduring monuments.

Another key element of Thatcherism was opposition to the aggrandising ways of the EU. In many respects, this derived simply from Thatcherism’s endorsement of the patriotic agenda and the view of the UK as special. But it also derived from the view of the Union as inherently socialist. So wider competence and greater powers for the EU equalled defeat in the war against socialism.

In this regard, Thatcherism has had a mixed record. Baroness Thatcher was unable to keep the pound out of the ERM but Gordon Brown was steadfast in keeping it out of the euro. The Labour Government joined the Social Chapter of the Maastricht treaty, from which John Major had negotiated an exemption, but the UK labour market still remains freer than most in the Community.

History will tell whether this marks the high water mark of EU integrationism but if so, the intellectual roots of the change were laid down by Baroness Thatcher in her Bruges speech of 1988 when she said that the EU could either try to deepen its union or widen it to include more countries, but not both.

And in her view its mission was to widen the membership. The accession of 10 new members in 2004, followed by Bulgaria and Romania, is a fulfilment of this vision. Moreover, it does look as though the extension of the EU will inhibit its deepening, just as Mrs Thatcher envisaged.

So what is the overall assessment of Thatcherism’s achievements? I have a nightmare vision of the future in which countless PhD students are researching Thatcherism and they overwhelming conclude from the evidence that Mrs Thatcher did nothing to transform the British economy. After all, the point of the wave of radical reform should have been to raise the UK’s economic growth rate but there is no evidence in the economic statistics that she achieved this.

This only goes to show how misleading statistics can be. Major changes of mind and institutions do not neatly fall into periods conveniently defined by academic investigators. They take time to have their full effect and it takes imagination and insight to perceive it.

Anyone who lived through this period can be in little doubt about the importance of Thatcherism. Because of its changes, people were more strongly motivated, competitive, money-minded and harder working. Companies were more efficient and focussed on profit. The country was more open to the world and self confident about its place in it. Moreover, by and large, these changes endured.

The fulfilment of Thatcherism was to be seen in the early economic achievements of the Labour Government. Although Gordon Brown regularly trumpeted the good performance of the British economy as though this were the sole result of his policies, in fact it was the result of the Thatcher government’s micro reforms allied with his macro reforms, which themselves built on developments under the Conservatives.

Of course, this all ended in tears – partly because he took one element of Thatcherism too far, and partly because he completely flouted another. Light touch regulation emerged seamlessly from the idea that competitive markets always work well when left to their own devices – even in the fragile world of finance. Gordon Brown’s folly was to follow this notion to an absurd extreme while allowing government spending to soar to bloated levels, thereby reversing a key part of the Thatcher revolution.

Despite the failings and travails of the financial markets, the greatest legacy of Thatcherism is to be seen in the position of London. In the 1970s it was a dowdy city. The role of capital of the empire had gone and nothing had replaced it. It seemed to be overshadowed by Paris, never mind New York. Then it emerged, not just as Europe’s leading city but the world’s one truly global city, surpassing even New York, amusingly under the mayoralty of a bete noire of Thatcher’s – Ken Livingstone. This owed nothing to Livingstone and almost everything to Thatcher.

And it continues under Boris Johnson. London is now successful and exciting in a wide variety of spheres above and beyond the financial – in fashion, the arts, even food. But how could this have happened without the rejuvenation of the City as an international financial centre? And how could that have happened without low taxes, openness to foreigners and foreign capital? How could these have happened without Thatcherism?

In short, in assessing Mrs Thatcher’s economic legacy, I can do no better than quote the following, which is a translation of the Latin words inscribed on the floor underneath the dome of St Paul’s Cathedral written in relation to Sir Christopher Wren: “Reader, if you seek his monument, look around you.”